Drop in on any business dinner in China, and there's a good chance that a bottle of a fiery local alcoholic beverage will be close by. Premium brands like Maotai -- a liquor made from water, sorghum and grain, and produced in the remote province of Guizhou -- can now sell for several thousand dollars a bottle.
That's good news for Langjiu Group, the only privately owned distiller among China's five largest spirits companies. But Langjiu's prospects weren't always rosy. At the turn of this century, the Chengdu-based enterprise was close to going under. Then Wang Junlin arrived on the scene. Wang had already built a career out of bringing companies back from the brink. First, there was Luzhou Medicine Factory, which he swiftly restructured and made profitable in 1992, before renaming it Bao Guang Group and buying 76.56% of it from the state. Next was Sichuan Changjiang Engineering Machinery Group, also state owned, in 1999, which Wang returned to profitability two years later.
Then it was Langjiu's turn. Appointed its chairman and CEO in 2001, Wang swung into action. Radical restructuring and re-branding were just some of the measures he launched before taking part in a management buyout that gave him an increased stake in the firm, and the company a new lease on life. Revenue of Langjiu Group grew more than ten times in the last five years, at least five times faster than that of other public Chinese spirits companies. By next year, revenue is expected to be some RMB 10 billion (US$1.6 billion), up from RMB 5.8 billion in 2010.
The 44-year-old native of Sichuan province recently sat down with China Knowledge@Wharton to talk about not only the firm's high-speed turnaround and what it's like competing against state-owned behemoths, but also his vision for China's spirits industry and plans to make Langjiu "bigger and better."
An edited extract of the conversation follows.
China Knowledge@Wharton: It's been more than 10 years since you've been Langjiu. What was it like when you arrived?
Wang Junlin:Langjiu was in terrible shape financially in 2001. Sales were around RMB 300 million, and most of its products were low end. It was paying RMB 100 million in interest on a bank loan of RMB 1.3 billion, and staff salaries were another RMB 100 million. If you added in other expenses, including taxes, the company was losing RMB 100 million a year. However, China was in the process of restructuring its state-owned companies. Because of my track record as a turnaround manager at another big state-owned company [Bao Guang], local government officials thought I would do well at Langjiu, and asked me to take charge of it.
China Knowledge@Wharton: Did you hesitate when you were asked?
Wang: No, I didn’t hesitate because Langjiu is one of six well-known traditional liquor brands in Sichuan province [in central China], each with its own rich history and reputation. In addition, Langjiu’s location made it well positioned geographically [in terms of its climate and environment] to produce good liquor.
China Knowledge@Wharton: How did you pay for the acquisition?
Wang:Langjiu was valued at more than RMB 600 million, and I paid RMB 490 million out my own pocket to buy it. While I had some savings, it was not enough, so the local government agreed that I could pay in installments. Any profit at Langjiu would go toward paying that off. However, the government retained ownership of the brand, and we had an agreement that if annual sales rose above RMB 3 billion, I would receive a 10% stake of the brand, with another 10% added for every RMB 1 billion increase in sales above the previous year. [Editor's note: Wang now owns more than 60% of the brand.]
China Knowledge@Wharton:How did you turn the company around?
Wang: I stabilized the old team, got rid of redundant departments, reducing the number to seven from 27, and replaced much of the middle management. We really took off in 2004, when we streamlined to 100 products, getting rid of [underperforming] low-priced ones after analyzing the brand and product positions of each. We finally settled on a “pyramid” of a dozen products [from lower priced to higher priced]…. At the same time, we launched a big, successful marketing campaign called “Chinese Lang" (lang in Chinese means men) … and aggressively built up sales and distribution channels across the country. All this helped revenue at Langjiu to grow rapidly in a couple of years.
China Knowledge@Wharton: Where are sales heading now?
Wang:Sales were RMB 365 million in 2004, and have been growing more than 50% annually over the past six years. Sales were RMB 5.8 billion last year and we're on track to pass our RMB 8 billion target this year and reach RMB 10 billion next year. Our biggest seller right now is the high-end Honghua Lang brand, which accounts for 60% of total sales.
China Knowledge@Wharton: China's spirits industry is in a high-growth phase today. What has changed?
Wang: It has grown very rapidly over the past three to five years. A bottle of Dream Blue by Yanghe [another Chinese distiller] once sold for RMB 100, but it's been raising its profile as Chinese consumption grows [and now sells for RMB 600]. I expect the low- and mid-level parts of China's spirits industry to grow rapidly. Sales volume for spirits in the RMB 100-to-RMB 500 price range will double or triple in the next decade from 200,000 tons today. Large companies with annual sales of as much as RMB 100 billion will emerge in the next five to 10 years, and most of the top five companies right now will reach that scale.
China Knowledge@Wharton: What is the competitive landscape looking like, and what sort of barriers to entry are there at the high end?
Wang: The high end is dominated by several companies, includingGuizhou Maotaiand Wuliangye, which have more than 60% of the market share. Langjiu, Luzhou Laojiao and Yanghe dominate the remainder. I predict that no more than five companies will end up among the top high-end players, with most of the volume concentrated among the top two or three. The next few years will be crucial for determining whether Langjiu's high-end series can make that top team.
Before even thinking about making it in the high end, however, the production process has to be first rate. Guizhou Maotaiand Wuliangye have better production capabilities than others. Also, you have to have a certain scale. For example, for every 10 tons of spirit that Wuliangye produces, only one ton is high end. It’s impossible to produce good liquor without scale. The third factor is physical location. To make 30- to 100-year-old Jiang Xiang, you have to have the right environment. Right now, only Guizhou Maotaiand Langjiu can do that [because of where they are located -- in Western and Central China, respectively]. If you make it in other regions, it will taste different.
China Knowledge@Wharton: Is the consumption of high-end liquor mainly for business occasions?
Wang: Business consumption accounts for a big portion [of sales], but private consumption is catching up. Right now, China has a lot of wealthy people so private consumption is increasing rapidly. Our luxury 100-year Lang costs RMB 100,000, and one client bought 60 bottles in one go to add to his collection. On top of business events, some wealthy people like to collect Chinese luxury spirits and put them on display at home.
China Knowedge@Wharton: What is Langjiu's medium-term strategy?
Wang: We will invest more than RMB 2.5 billion in facilities in the town of Erlang, to reach between 40,000 and 50,000 tons of production capacity and 150,000 tons of reserves by 2013. Meanwhile, we are going to invest more than RMB 2 billion to transform Erlang into a tourism destination over the next five to eight years, [helping us] experiment with the marketing of our products. The idea is not to make money through tourism, but to give visitors first-hand experience of production at Langjiu. Then they will understand why the product is so good and deserves a high price tag.
China Knowledge@Wharton: Does Langjiu plan to enter international markets?
Wang: We will be looking at global markets [starting] next year. That will require a large amount of capital. China's spirits industry will definitely go global in the next decade. My plan is to transport equipment to foreign markets and co-operate with local enterprises to build packaging plants. The liquor would still be Chinese, but the packaging [would be] designed for local tastes. We will promote the liquor to consumers there gradually before seeing results in five to 10 years. The current business model of only selling spirit in tax-free stores and to small Chinese trading companies is not an effective way of expanding in foreign countries.
However, we need three things for the globalization of Chinese spirits to happen. First, the Chinese government needs to be strong enough to ensure the safety of capital and assets; second, more Chinese need to travel abroad to increase more cultural exchanges; and third, the company needs enough cash to sustain at least five years of losses. In the early years of when a company starts doing business overseas, it definitely needs to invest heavily.
China Knowledge@Wharton: What advantages would Langjiu have in global markets?
Wang: We are a privately owned enterprise that has an incentive to go global. At well-known state-owned spirits companies, the CEOs don't have many incentives to go global because they would incur losses in the early years. The risk of failing after making all that investment is also high. If I am the chairman of a state-owned company and the government doesn't ask me to [expand] but I do anyway, I have to take personal responsibility for every year of losses. If the first and second years are losses, I would have to resign before my tenure is up.
Nowadays, the domestic market is very good, and a company will make several billions [of renminbi] every year here. So why would you bother to take the risk and go abroad? I don't expect incumbent state-owned Chinese spirits companies to go into international markets in the next four or five years.
China Knowledge@Wharton: Can foreigners’ drinking habits change? Which market would you go into first?
Wang: Chinese didn’t always drink wine, but more and more love to now…. As for the foreigners who work at Langjiu, they prefer to drink Chinese spirits on weekends. You won’t be able to change all of a person's habits, but you can change 10% or 20% of them.
I am thinking of looking at Russia first. This year, we had around 500 employees visit Russia. We found that it has a big population and Russians like liquor. Japan and Korea also have potential, but their populations are smaller. It would be more difficult in the U.S. or Europe because their lifestyles are different. They dine by themselves, while the Chinese love to gather together to dine, drink and have fun together.
China Knowledge@Wharton:Moët Hennessy acquired Sichuan province-based Wen Jun Spirit in 2007. Diageo is now in negotiations to acquire SwellFun, another well-known Sichuan brand. How do you view these foreign competitors?
Wang: Wen Jun Spirit is sold in only a few restaurants here and costs RMB 1,000. People say its international sales are good. The top five Chinese spirits brands notwithstanding, foreign companies might be successful in regional markets, but have little possibility of building a high-end spirits brand nationwide.
To run a spirits business in China well, it's not enough to just invest money. First, the barriers to entry are very high. To develop a new national brand, you have to enter into co-operation agreements with good local brands. Second, high-end Chinese spirits have a limited geographic reach. These two areas areguarded jealously in China.
China Knowledge@Wharton: Will Langjiu go public any time soon?
Wang: We won’t consider going public for the next couple of decades. Going public is not just about financing. Once you go public, you have to have greater [accountability] and be more transparent. For example, if we decided to increase our managers' compensation, investors might not agree. We now have flexible processes that are suitable for Langjiu’s development needs.
China Knowledge@Wharton: During your career, you have turned around several companies. What's your approach?
Wang: First, the company has to get focused and look for potential breakthroughs. Most important is asking, “What core products do I focus on?” And the products need to have sustainable [growth potential] and be high quality. Second, there needs to be high demand for your key products. Third are the people. You can't do good business without good people. In terms of human capital management, I tend to retain the original team, but will recruit new people and rely on them to push for restructuring. Meanwhile, you have to set up good incentive mechanisms to motivate people.
Before, compensation at the state-owned company was neither competitive nor flexible. Now, we offer good basic salaries, and have performance targets for bonuses. For university graduates, we try take into consideration their ambitions and the corporate strategy to come up with a fair basic salary on which they can live comfortably. To supplement that, if they want the capital to buy a house or get married, they can if they hit performance targets.
The methodology for turning around a company is simple. First, analyze future demand and focus on good products with good potential, while building the brand; second, develop a strategic plan for the company and set up a corresponding incentive mechanism; and third, choose good, talented people who can hit your targets.
China Knowledge@Wharton: Do you offer employees stock options?
Wang: We do not offer stock options as there's a time limit on them. Someone might perform well today, but leave tomorrow. We prefer to offer a basic annual salary with performance-based rewards, which is more realistic.
We believe our mechanisms attract the best talent because talented people have three demands. One is acknowledgement. People need to be acknowledged and respected by society. Second, they need to be able to showcase their talent. Third is income and benefits. You can’t do well without all three. Some CEOs look at talent management through only one prism, but I prefer to combine these three measures. A regional manager who used to manage a RMB 10 million business but now manages a RMB 1 billion business not only gets paid more for making money in a completely legal and healthy way, but also receives the recognition and respect by society.
At the same time, we are continuing to improve our talent management and compensation systems to make good people the best they can be. In Langjiu, we have the 2-7-1 principal -- we promote 20% of our employees, retain 70% and cut 10% of the worst performers.
As a leader of the company, the most important thing is to design a mechanism to make all employees feel they have hope. You have to offer a platform for the ones who are capable of making a name for themselves and offer rewards when they work hard.
China Knowledge@Wharton: How do you know whom to hire?
Wang: I have only two criteria: Capability and incorruptibility, which means a person won’t put the company's money into his pockets and doesn't abuse his position within the company.
China Knowledge@Wharton: Is it because Langjiu is privately owned that you have the flexibility to develop these management mechanisms?
Wang:State-owned or privately owned -- it’s just a matter of ownership. My view is that ownership does not determine the performance of a company’s management. State-owned companies can also design great mechanisms, while even privately owned companies can go under.
Langjiu has grown well over the years, and not just because I am the boss with the decision-making power. As a matter of fact, many CEOs of state-owned companies have just as much power as I do. The most important thing is that I started my career as a salesperson and have gone up the management ladder wrung by wrung. From each position, I learned and now know how to select and motivate people.
China Knowledge@Wharton: If ownership is not that important, what is the most important thing for motivating an entrepreneur or other professional?
Wang: The most important thing is to have aspirationand dedication. Managers can't do well if they only care about what's in their own pockets. Langjiu will one day be run by a 'professional' chief executive, but whether that CEO can manage well is not just a matter of how much he is paid, but whether he has the heart and passion to make the company bigger and better.
I now manage hundreds of billions of [renminbi of] assets, and no longer worry about my life. So why do I still work hard? The only thing that motivates me is that I want to work another five or 10 years and leave something valuable for society. That I am willing to bear huge [financial] losses in the early stages of globalization to promote Chinese spirits in foreign markets is part of this mission.
In fact, compensation for state-owned company managers today is increasing rapidly. Along with stock options, their income levels are even higher than some multinational CEOs. However, the key is whether managers have aspiration and dedication. If not, they won’t work out, even if they're earning RMB 20 million a year.